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Is MF Global Getting a Free Pass?

It’s sure starting to look as if Jon Corzine is going to get away with it.

By now, it has been well established that Corzine’s former firm, MF Global, committed the sin of sins for a broker-dealer. In late October, during the final, desperate days before it entered bankruptcy proceedings, its executives took money from segregated customer accounts — money that belonged not to MF Global but to the farmers and commodities traders that were its clients — and used it to prop up its rapidly collapsing business. Nor was this petty cash: of the $6.9 billion in customer assets that MF Global held, a stunning $1.6 billion is missing. There is virtually no chance that the full amount will ever be recovered.

Let’s not mince words here. These executives committed a crime. Virtually every knowing violation of the Commodities Exchange Act is a crime, but taking money from segregated customer accounts is at the top of the list. And for good reason. Customer money is supposed to be sacrosanct. If a broker-dealer goes bankrupt, the segregated accounts are supposed to remain safe, a little like the way bank deposits remain protected if a bank goes under. Indeed, customers need to be able to trust the fact that their money is segregated and protected at all times. Otherwise, the markets can’t function.

Yet, a few weeks ago, Azam Ahmed and Ben Protess, who have done a remarkable job covering the MF Global bankruptcy for The Times, wrote an article suggesting that prosecutors were having trouble putting together a criminal case against anyone at MF Global. So far, wrote Ahmed and Protess, they’d been “unable to find a smoking gun.” In fact, they continued, “a number of federal prosecutors have expressed doubts” that MF Global “intentionally misused customer money.” Apparently, the current theory is that it was all just a big accident, the chaos of those final days causing the firm’s executives to tap into customer funds without realizing it.

Excuse me while I roll my eyes. Of course there isn’t a smoking gun. As a general rule, financial professionals tend not to write e-mails that say, “Hey, we’re desperate. Let’s break into the customer accounts!” And, of course, they are always going to say it was unintentional. They are saying it already, starting with Corzine, who told Congress last year that “there was no intention to violate segregation rules.”

Photo

Joe NoceraCredit
Fred R. Conrad/The New York Times

As for the chaos, you bet it was chaotic at the end. How could it not have been? Last month, James W. Giddens, the bankruptcy trustee for the broker-dealer arm of MF Global, issued a report that vividly described the scene: “The rush to meet funding needs ... led to billions of dollars in securities sales, draws on credit facilities and a web of intercompany loans. ... The company’s computer systems and employees had trouble keeping up. ... A number of transactions were recorded erroneously or not at all. ...” And so on.

Well, fine. But is it really plausible that you can take $1.6 billion — nearly 25 percent of the customer assets under management — and not know you’ve used customer money? It is not. One theory, which is implicitly suggested in the trustee’s report, is that the executives “borrowed” the money thinking they would be able to replace the funds quickly, which they then couldn’t because the counterparties wouldn’t give back the collateral. That’s still a crime.

I understand that bringing complex financial cases in front of a jury is not easy. But what prosecutors don’t seem to understand is that the country needs them to bring these cases. When they took a pass on Angelo Mozilo, the former chairman and chief executive of Countrywide, and Richard Fuld, who was chief executive of Lehman Brothers when it went bankrupt, they sent a signal that the highly paid executives who gave us the financial crisis would not be held to account.

A failure to prosecute anyone at MF Global would be, if anything, even worse. It would mean that executives at a broker-dealer can indeed steal customer money and get away with it — so long as it was “unintentional.” And it would only deepen the cynicism so many people feel about government. I’ve heard it suggested, for instance, that the Justice Department won’t prosecute Corzine because it would hurt President Obama. (Corzine, the former governor of New Jersey, had been a big fund-raiser for the president.) I don’t happen to subscribe to that theory, but I certainly understand why others might.

To be sure, it is early yet. Federal investigators are still digging into the facts surrounding MF Global’s failure, no doubt searching for that elusive smoking gun. But if, in the end, they decide they can’t make a case, I hope they understand what they are telling the rest of us. Giving the big guys a pass isn’t good for the financial markets. And it isn’t good for democracy either.

A version of this op-ed appears in print on March 13, 2012, on Page A25 of the New York edition with the headline: Is MF Global Getting A Free Pass?. Today's Paper|Subscribe